States Debate How to Use New Revenue

February 3, 2014

Many states are looking to cut taxes and increase school spending in 2014, says the Wall Street Journal.

  • Tax revenue reached its pre-recession peak in the middle of 2013 after a sharp revenue drop in 2009.
  • Moody's Analytics found that state revenue rose 6.7 percent nationally in the fiscal year ending in June 2013.
  • State reserves are also at their highest level since the recession.
  • Spending, on the other hand, still sits below peak 2008 levels.

As state budgets begin recovering from the recession and revenues increase, governors are looking to make some fiscal changes. Debate has emerged over how to deal with the money. Some want to see more funding and expenditures, others are encouraging tax and budget cuts. Many states want to hold on to the excess funds, rather than spend them, to deal with pension costs and revenue swings down the road. Tax cuts are on the table in New York and Wisconsin, while Georgia and Missouri are looking to increase funding for K-12 schools with their newfound revenue.

Economists have warned that while tax revenue has surged, that surge is already beginning to slow. Part of this is attributed to the fact that many of these gains came about from taxpayers shifting their income around, indicating that the gains are not a sign of growth but are instead a function of timing.

And states still have a number of financial problems with which to grapple, especially health care and pension costs.

The state of Wisconsin is a good example of the debate.

  • Governor Walker has called for cuts to the income and property taxes, but some legislators, concerned about cost increases to state programs, have balked at the idea.
  • Wisconsin Democrats have called for the funds to be put toward education.

Source: Mark Peters, "States Weigh New Plans for Revenue Windfalls," Wall Street Journal, January 26, 2014.

 

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